Surprise Mortgage Fees Stir Calls for Regulatory Action
Kathy and David Binninger got a costly lesson in surprise fees when they refinanced their home earlier this year. And it’s a lesson consumer advocates say is all too common lately.
The longtime homeowners had bought, sold and refinanced properties several times before--but when they went in to complete this deal, David Binninger was convinced there must have been a mistake. The loan’s closing costs, which had been estimated at about $4,000, amounted to a walloping $8,300, including a nonrefundable “application fee,” a “commitment fee” and an “escrow waiver fee.”
He spent 30 minutes going over every line on the form, thinking that the company must not have credited them for the more than $3,000 they paid upfront. He considered rejecting the loan on the spot but, because so many of the fees appeared nonrefundable, he thought he and his wife stood to lose too much.
“At that point, what was I going to do?” asked Binninger, a Delray Beach, Fla., professor of genetics.
There was no mistake. The Binningers’ lender had simply charged closing costs that amounted to nearly 7% of the loan amount--more than twice the industry norm--and twice what Binninger said he was told to expect when he and his wife applied.
Although the Binningers’ experience is more egregious than most, federal housing and finance officials say that unexpected fees and charges at the close of escrow are so common that they’re pressing for federal legislation to stop them.
In a joint report to Congress in July, the Federal Reserve Board of Governors and the Department of Housing and Urban Development urged reforms that would crack down on abusive lending practices and make so-called settlement costs in mortgage transactions more predictable. The bank and real estate regulators have proposed two methods to make that happen.
One method would require an upfront disclosure of a lump-sum amount that would cover nearly all closing costs--the main exceptions would be for title insurance, state transfer taxes and fees. The lump-sum amount would be guaranteed. Because consumers wouldn’t have to worry about the amount changing at the back end, they could shop for closing costs just as they shop for competitive interest rates.
The other option would be to put teeth in the Real Estate Settlement Procedures Act. RESPA requires lenders to provide a “good-faith estimate” of closing costs within three days of receiving a loan application. However, there are no penalties for not providing this disclosure--or for boosting the fees over the estimated amount.
In other words, while regulators agree that what happened to the Binningers was wrong, it doesn’t appear to be illegal under current lending laws. (The Binningers’ lender, however, is being investigated because of a flood of consumer complaints about the company’s alleged bait-and-switch tactics. The company could be found in violation of truth-in-advertising or other commercial codes.)
Indeed, there are two laws aimed at ensuring that consumers get all the information they need to shop for credit, but both fall short when applied to mortgage transactions, says a staff attorney at the Fed.
In addition to RESPA, the nation’s truth-in-lending law requires that lenders disclose a standard annual percentage rate, which is supposed to reflect the full cost of credit. However, in real estate transactions, a number of fees aren’t required to be included in the APR disclosure.
To clarify, let’s say that you’re dealing with a traditional lender, which takes in deposits and makes loans. This lender’s loan rate is going to hinge on the rate it must pay to attract deposits. This deposited money is ultimately the money you borrow when you take out a mortgage loan--plus a margin, which is aimed at recouping the bank’s administrative costs and providing the company with a profit. For example, let’s say the bank’s cost of money, or deposit rate, is 5%, and its administrative costs and profit margin amount to 2.5%.
If the bank discloses these costs in a straightforward manner, it will set its loan rate at 7.5%. However, in today’s hotly competitive market, banks are breaking out a host of administrative costs and, instead of rolling them into the interest rate, they are disclosing them as separate fees charged when the loan is closed, said Margot Saunders, managing attorney at the National Consumer Law Center in Washington. That allows them to exclude these costs from the APR, which ultimately misleads the consumer about the final cost of the loan.
Notably, the Mortgage Bankers Assn., which represents most of the nation’s lenders, supports drastically revamping mortgage settlement rules, too. However, the group differs on approach. Instead of giving lenders the choice of disclosing fees the current way or in a lump sum, the MBA would like to simply mandate the lump-sum approach and do away with itemizing fees.
“What we are trying to do is change the fundamental premise,” said Paul A. Mondor, senior director of regulatory affairs at the Washington-based trade group. “The current premise is that things like credit reports and appraisals are done for the consumer. They are not. These are things that the lender requires to make a loan. We think the lender should quote the consumer a guaranteed rate.”
The mortgage bankers’ group would also like to do away with APR disclosures, which require lenders to fold both rates and fees into a single number, which consumers can use to compare one loan with the next.
Some consumer advocates believe the APR continues to be a useful shopping tool. However, consumer advocates, industry leaders and regulators all say they are willing to compromise on some points in order to get settlement reforms into law in the foreseeable future.
In the interim, home buyers must be diligent about monitoring their transactions and rejecting junk fees.
Don’t hesitate to ask what a particular fee is for even when signing closing documents, suggested Saunders of the Consumer Law Center. If a fee is not mandated by law or reason, ask that it be removed. In many instances, insistent consumers have succeeded in having hundreds of dollars’ worth of fees removed.
If you are refinancing a mortgage rather than getting a new loan to purchase a home, you have the right to rescind the entire deal within three days of signing the loan documents, Saunders added. The lender is then required to return all of your money--even those so-called nonrefundable fees, she said.
